Privatisation, Restructuring and
Employee Retrenchment in Brazil: Issues
and Policy Responses
Armando Castelar Pinheiro
Brazilian Development Bank (BNDES)
Conference on “Privatisation, Employment and Employees”
10 – 11 October 2002, Ataköy, Istanbul, Turkey
A
brief overview of privatisation
Labour
market adjustment in 1990-2002
Labour
issues in the privatisation process
Main
conclusions
SD-2
Privatisation evolved in three stages
Stage I:
Small SOEs in competitive
sectors
Stage II: Industry
Steel
Petrochemicals
Fertilizers
Mining (CVRD - 1997)
Stage III: Infrastructure
Rail
Electricity (partial)
Telecom
Highways
Stage IV:
Banking
Infrastructure
Non-controlling shareholdings
SD-3
Total Results
(1991-2002)
US$ million
Sectors
Sale
Proceeds
Debt
Transferred
Total
Steel
5,562
2,625
8,187
Petrochemicals
2,698
1,003
3,701
Mining
5,202
3,559
8,761
Electricity
24,666
7,510
32,176
Sanitation
699
-
699
Oil & Gas
6,845
88
6,933
Telecom
30,491
2,947
33,438
Banking
6,357
-
6357
Transports
2,320
-
2,320
Minority shareholdings
1,149
-
1,149
Others
1,233
344
1,577
87,222
18,076
105,298
Total
August 2002
SD-4
Results by sector (1991-2002)
Oil & Gas: 7 %
Electricity: 31 %
Sanitation: 1 %
Other: 1 %
Banking: 6 %
Steel: 8 %
Petrochemicals: 4 %
Minority
shareholdings: 1%
Telecom: 31 %
Mining: 8 %
Transports : 2 %
SD-5
Annual distribution of privatisation results (1991-2001)
State Govt:
US$ 34,7 billion
Federal Govt.:
US$ 67,5 billion
37,5
US$ billion
27,7
Total: US$ 102,2 billion
10,7
6,5
2,0
3,4
4,2
2,3
1,6
4,4
1,8
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
SD-6
Total Employment in Six Largest Metropolitan Areas
(Number of Workers)
4500000
18000000
17000000
4000000
16000000
15000000
3500000
14000000
3000000
13000000
12000000
2500000
11000000
Manufacturing
Total
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
10000000
1982
2000000
SD-7
Unemployment and Productivity (Mnfg) in 1981-2002
160
9
150
8
7
140
6
130
5
120
4
110
3
100
2
90
1
80
0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Productivity
Unemployment
SD-8
Number of Employees and Salary Expenditures (1994)
Sector
Finance
CVRD
Eletricity
Oil
Telecom
Ports
Steel (1991)
Rail
Other
Total
Number of employees
Salary expenditures
Number
%
% of GDP
%
145132
19.3
1.91
50.3
21263
2.8
0.11
2.9
44245
5.9
0.24
6.3
54551
7.3
0.38
10.0
109497
14.6
0.38
10.0
13693
1.8
0.05
1.3
68914
9.2
58215
7.7
0.12
3.2
236503
31.4
752013
100.0
3.80*
100.0
(*) Does not include steel sector.
In 1994, employment in Federal SOEs represented less than 2% of the
overall non-agricultural employment,
SD-9
Ratio of Salary to Investment Expenditures: 1980-94
(%)
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
1980
1982
1984
1986
1988
1990
1992
1994
SD-10
Investment by Federal-Owned SOEs: 1980-94 (% of GDP)
6
5
4
3
2
1
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
0
Other
Itaipu
Rail
Steel
Ports
Telecom
Oil
Eletricity
CVRD
Finance
SD-11
Short-Term Impact of Privatisation on
Employment

Overall employment fell by a third, comparing the
pre- and post-privatisation periods

Three-fourths of this downsizing took place prior
to sale, while preparing the companies for sale

Downsizing was less pronounced for employees
working in production lines
Employment and salaries
Year of privatisation = 100
Median
%
Companies
Before After
Change
with growth
Number of employees
132.0
88.4
-33.0 %
2.4 %
Employees in production
activities
125.8
88.7
-29.5 %
10.0 %
76.5
96.5
26.1 %
64.7 %
Average salary*
* Total salary expenditures/number of employees.
SD-13
CSN: Employment and Productivity
25,000
542
22,134
500
18,222
16,125
15,000
15,082 14,773
15,147
295
10,000
296
314
400
13,707
326
403
10,995
11,086
225
5,000
163
160
300
200
100
-
1989 1990 1991 1992 1993 1994 1995 1996 1997
Year
Employment
Productivity (tons/employee/year)
Productivity
Employment
20,000
600
Embraer: Productivity
(US$ 1000/employee/year)
200
180
160
140
120
100
80
60
40
20
0
191
109
82
41
1994
1995
1996
1997
CVRD: Employment and Productivity
20,000
Employment
16,000
255,7
18,440
17,829
14,000
15,573
12,000
158,2
10,000
114,3
8,000
6,000
250
15,483
17,766
200
178,1
10,865
150
128,8
100
113,1
4,000
50
2,000
-
0
1992
1993
1994
1995
1996
1997
Ano
Employment
Productivity (US$1000/emp,year)
Produtivity
18,000
300
Railways: Employment
50,000
44,601
40,000
24,603
30,000
20,000
13,607
10,000
0
Before
Adjustment Period
After
Railways: Productivity
400
350
300
250
200
150
100
50
1995
Centro-Atlântica
1996
MRS-Logística
Tereza Cristina
1997
Sul-Atlântica
Novoeste
Impact on R&D Employment


Number of employees engaged in R&D
declined, but
Better educated people were hired, with an
overall improvement in quality.
19
The impact on overall employment
varied from one sector to another

In mature sectors (steel, petrochemicals, etc.), the rise in
productivity tended to prevail.

In infrastructure, privatisation led to a major increase in
supply, often compensating for the rise in productivity.

Moreover, in infrastructure privatisation allowed for
regulatory reform that brought new players (and jobs) into
the market.

Taking all these effects together, privatisation has had a
positive impact on employment
SD-21
Anecdotal evidence

In the year following privatisation employment fell by 10 thousand
jobs in the 40 companies considered in the survey (excluding the
telecom companies) compared to the year of sale, and by 35
thousand jobs compared to employment in the year before,

145 thousand new jobs were created in the telecom companies
alone (including the new telecom companies created after market
liberalisation)

13 mil jobs were created in the highway concessionary companies

In only one of the 37 highway concessions awarded until 1999,
3,500 jobs were created in outsourced activities (cleaning,
signalling etc,)

One of the new (B-band) cellular operators has 1,239 suppliers
SD-22
Critical management problems in privatised companies

Technological backwardness

Lack of maintenance of equipment and installations

Poor information systems

Significant environmental liabilities and debts with tax authorities

Lack of strong business culture and excessive focus on production
(engineering-oriented)

Excessive number of hierarchical management levels

Staff lacked motivation

Often, time with the company, rather than merit, as the main criterion for
promotion

Large number of labour judicial disputes
SD-23
Outsourcing

Direct impact of privatisation was not large, although there
were exceptions

Core business activities that had been outsourced started to
be carried out directly by the companies

Outsourcing increased in the cases of security, catering and
transportation of employees and, in some companies,
maintenance of facilities and computer services.
SD-24

Although privatisation affected only a small share of the labour force, it
faced strong political opposition,

To deal with inside opposition, the government offered:

Incentives for early retirement (age-skewed downsizing)

Bonus for workers willing to leave the firm

Possibility of buying company shares at highly subsidised prices

158,647 employees bought subsidised shares as part of the privatisation
of their companies, accounting for US$ 731.4 million in revenues,

The share of total capital offered to employees ranged from 3.1% to 20%,

The percentage of capital subscribed in individual companies ranged
from 0.1% (Álcalis and Geraul) to 20% (Açominas, Cosipa and Caraíba)

In some cases public credit was extended to employees to buy shares

With privatisation, company bylaws were changed to include a
representative of employees in the board of directors.
Structure of share sales in the case of CVRD
Common
Stock
Preferred
Stock
Total
0
26 - 29
4.45
6.3
5.1
26.5 - 31.5
-
17 - 20
76
6.3
51
Strategic Investor 40 - 45
Employees
Global Offer
Total
26
23
Often, employees ended up accepting privatisation
without much opposition

Although there was the perception that bloated work forces
would need to be downsized, employees favoured privatisation
for various reasons:

In some companies (e.g., CSN and Embraer), there was the
perception that the alternative to privatisation was closing the
company down

State ownership was perceived to limit management flexibility,
access to finance and competitiveness

Privatisation offered the possibility to make a financial gain

For younger employees, privatisation offered a greater
opportunity to advance in the company

It was often the case, though, that employees did not hold on to the
shares they bought.

In most of the cases in which employees kept their shares, they
participated in investment clubs with important shareholdings in the
company, often participating in the controlling group.

Although there is no systematic evaluation of how well SOE
employees did with privatisation, anecdotal evidence suggests that

For employees who kept their jobs, privatisation seems to have
been in general positive

For those who left the company, the evidence is mixed, with many
former workers engaging in unsuccessful businesses of their own
SD-28
Main conclusions

The promises of privatisation were, broadly speaking, fulfilled,
contributing to limit the growth of the public debt, raising
investment and efficiency and, through the attraction of FDI,
helping to close the external accounts.

The impact on employment has been mixed.

The workforce of the SOEs has declined, with the rise in
productivity more than compensating that of output.

In some sectors, notably in infrastructure, though, the overall
increase in sector output has led to higher employment levels.

Overall, however, privatisation played a minor role in labour market
dynamics, due to the relatively small size of the SOEs’ workforce
Main conclusions

Employee opposition to privatisation was
successfully mitigated by selling SOE shares to
employees at subsidised prices.

With privatisation human resource policy changed
to reduce the number of management levels and
make promotion schemes more merit sensitive.

Pension schemes were also geared towards
defined contribution schemes and sounder
management.